Pros and Cons of Payable on Death Accounts

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 What Is A Payable On Death Account?

A payable on death account is also referred to as a “POD” account, and is a type of financial tool frequently used to prevent monetary assets from entering into the probate system. The probate system is the legal process of administering a decedent’s estate.

One of the best ways to avoid costs and fees associated with the probate process is to have a valid will in place when a person dies. Their will provides specific instructions regarding the distribution of their property. While this is not necessarily an alternative to probate, it is the ideal standard for the distribution of an estate upon a person’s death.

There are some specific financial instruments which can be considered alternatives to probate. These alternatives allow property and/or funds to be passed to beneficiaries when a person dies, without that property and/or funds passing through the probate process. A POD account is one such tool. Other examples may include trusts and joint bank accounts, which will be further discussed later on.

Other instruments available to transfer property to beneficiaries outside of the probate process may each have its own benefits and drawbacks. These will likely differ depending on an individual’s intentions for their property. An example of this would be how depending on the person’s situation, a joint bank account may be able to accomplish a person’s goals for their funds. In other cases, a POD account may be more suitable for their needs. The guidance and advice of an area attorney can be especially helpful in determining which tools are best suited for a specific person’s intentions.

How Does A Payable On Death Account Work?

A POD account is sometimes referred to as a “poor person’s trust.” This type of account is generally used when the bank account holder instructs the bank to transfer the funds to another person, contingent upon the death of the account owner.

The account owner can access the account while they are still alive, even if the POD arrangement has been made. The beneficiary or recipient of the funds will receive whatever funds remain in the account at the time of the account owner’s death.

Payable on death accounts may also be known as:

  • An informal trust;
  • A revocable bank account trust;
  • A tentative trust; or
  • In trust for, or ITF accounts.

Another type of financial mechanism, which is known as a Totten trust, may be considered as a type of payable on death account. In order to create a Totten trust, the account owner completes forms at a bank for their account which turns their existing checking and/or savings account into a POD account.

At any time, the account owner may:

  • Close the account;
  • Withdraw all funds in the account; and/or
  • Change the named beneficiary.

Should the beneficiary of a POD account die before the account owner, the account will pass into intestacy. These are the default rules on property, mandated by the state, after a property owner dies; as such, these rules vary by state. Of course, the account owner may list another beneficiary if possible.

It is important to note that a payable on death account should not contradict a validly executed will. If the two documents contradict one another, litigation may ensue. An example of this would be if a validly executed will states that the testator’s “entire estate shall be divided equally among my three children.” The children may need to litigate whether or not the POD was included in the will as part of the entire estate.

If a POD account does contradict a will, the court will attempt to divide the estate according to the intent of the testator. Because of this, if the testator wishes for the beneficiary of the POD to divide the account with other named beneficiaries, the will should state so explicitly.

Some payable on death accounts are processed quickly. These funds may be used to pay off:

  • Estate debts;
  • Funeral costs; and/or
  • Executor fees.

Alternatively, if a person puts the majority of their funds into PODs, their estate may not have enough money to pay off these expenses. In such cases, a court may be forced to take money from PODs in order to pay estate expenses.

What Are Some Pros And Cons Of Payable On Death Accounts?

Before establishing a payable on death account, it is helpful to learn and consider some of the pros and cons associated with such accounts. Some of the notable pros of such accounts generally include:

  • Ease Of Creation: Generally speaking, all that is required to create a POD account is to inform the bank that you would like to make your account payable to a specific person upon your death. Additionally, it is generally free to do this. In this way, POD accounts help avoid the costs of probate, as previously mentioned;
  • No Monetary Limitations Or Restrictions: There are generally no limits placed on the amount of money that can be transferred to a beneficiary through a payable on death account. This is useful because the account’s owner does not need to be mindful of such limits or restrictions during their lifetime;
  • Easy To Claim The Money: One of the defining features of a payable on death account is that it is easy to claim the account’s contents. The recipient of the account’s funds only needs to present the bank with a proof of ID and a death certificate copy in order to claim the money; and/or
  • Multiple Beneficiaries: While the account’s owner is still alive, they may name as many beneficiaries of their POD account as they wish. The proceeds may be split evenly between all of the named beneficiaries, or divided in any way that the owner prefers. Additionally, the account’s owner may also change the beneficiary or beneficiaries of their POD account at any time.

While POD accounts certainly have their advantages, there are also some notable cons. Some of the cons associated with a POD account include, but may not be limited to:

  • No Alternate Beneficiaries: In general, the account’s owner will not be able to name an alternate beneficiary for their POD account. What this means is that if the named beneficiary passes away before the account’s owner, the account funds will be distributed to their estate, passing through probate proceedings. However, as previously discussed, it is both possible and sometimes advisable to name multiple beneficiaries for POD accounts; and
  • No Rights For The Beneficiary: While the account’s owner is still alive, the beneficiary will not have any rights to claim the account funds. They can only claim the account funds upon the account owner’s death. This can create a delay if the owner changes their mind and wishes for the beneficiary to receive money immediately.

Whether these pros and cons may affect you will depend on your purposes and intentions regarding the funds. What could be considered a drawback for one person might actually be an advantage to another.

It is dependent upon what is needed for the beneficiary, and what your goals are regarding the payable on death account funds. You may wish to consult with a lawyer for more guidance in terms of how a POD account can help your situation according to your needs.

Are There Any Other Options?

As previously mentioned, a POD account is just one example of possible probate alternatives. You could transfer the money to a named beneficiary through a will document. Or, you may wish to create a revocable living trust, which is very similar to a POD account.

Both a will and a trust can help you avoid having your money pass through probate. Additionally, wills and trusts generally allow the person more flexibility than POD accounts, such as naming alternate beneficiaries. Alternatively, there may be more complex requirements in order for a will or trust to be considered valid. In this way, POD’s are generally much more simple to create.

Do I Need An Attorney For A Payable On Death Account?

If you are considering establishing a POD account, or are experiencing issues associated with such an account, you should consult with an experienced and local estate lawyer.

An attorney will be best suited to helping you understand your rights and legal options according to your state’s specific estate laws, and will also be able to represent you in court, as needed, should any legal issues arise.

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